Why To Invest in South Africa: An Analysis of Investment Advantages, Prospects

The end of the apartheid era in 1994 brought many changes to
South Africa and this too has been reflected on the economic front. Despite
struggling for the early years, the rainbow nation made a significant leap
forward in restoring order to an economy battered by years of international sanctions
and domestic violence. Within two decades of national reconciliation and
economic reconstruction, South Africa has turned to become Africa’s second
largest economy and the most favored investment destination.

A soon as the first African National Congress (ANC)
government was sworn in 1994, efforts to restore order to the economy shattered
by sanctions began earnestly. Fiscal discipline and determined efforts help
increase the economic capacity of people and build a strong edifice for
eliciting growth. In 2000, the then President Thabo Mbeki took bold initiatives
with stepped up governmental spending, more space to private players,
liberalized policies and relaxation in labor law restrictions that attracted
massive foreign investment and spur economic growth for a decade. The results
were visible from 2004 onward with strong economic expansion and capital
formation. South Africa experienced an average growth rate of approximately 5
per cent in real terms between 2004 and 2007.

The rapid and robust diversification of the domestic
economy, liberal trade policy, strong fiscal discipline, friendly monetary
policy, effective infrastructure in place and sizable English educated manpower
make South Africa a leader among the developing economies. Political stability over
the years and determined market, trade and labor reforms have contributed to its
center stage position as one of the economic powerhouses not only in Africa,
but also at the global stage. Johannesburg, the financial capital of the
country, is home to Africa’s largest stock exchange. South Africa also has the
most sophisticated banking and financial services sectors in the entire
continent.

The country withered the global slowdown in the late 2000s with
a “technically decline in growth” – a word used by Tito Mboweni, a former
governor of South African Reserve Bank, to refer to minimal economic
contraction. Compared to China, India and other emerging markets, South Africa
struggled through the recession. The period 2008 to 2011 only recorded average
growth just above 2 per cent, largely attributed
to the global economic recession. It picked up again led by private and public
consumption growth in 2012, while export volumes and private investment grow
steadily. However, the slowdown returned in 2014 only to be beaten back in
2015. The rebounding and recovery is not new for South African economy, which
now steers the African dream and has become well integrated into the global
economy.

Though there was a 15 percent fall in foreign investment in
monetary terms, South Africa remained at the top of the list of destination
countries in Africa measured by number of projects in 2014, according to a
report from fDi Intelligence, a data division of the Financial Times group.
This corresponds with 1.4 percent GDP growth last year, the lowest in the
post-apartheid era. However, the 2015 first two quarters have witnessed visible
changes with industrial action, domestic consumption, demand from trading
partners, filling up of infrastructure gaps and new investment rates are on the
positive side.

In 2015, the GDP is expected to cross $500 billion from $350
billion in 2014 and country’s foreign exchange reserves are already at $50
billion. Considered as an upper-middle economy along with Mauritius, South
Africa accounts for almost a quarter of Africa’s gross domestic product in
terms of purchasing power parity. The GDP per capita in South Africa in 2014
was $6086, highest in Africa after tiny Equatorial Guinea, Seychelles,
Mauritius and sparsely populated Botswana. The national government has a tax revenue
income of about $80 billion (2014), the highest in Africa, and 45 percent debt
to GDP ratio, one of the lowest compared to the developed and developing
economies.

The foreign direct investment in South Africa has increased
by an impressive 86% in the past two decades. New investments in infrastructure
and significant focus on spatial development at the local, regional and
national levels, including development corridors, improvements in service
delivery and decentralization of policies backed by determined implementation
have opened new avenues that assure foreign investors in terms of strong
growth, participation, business freedom and return. The largely free-market
economy of Africa backed by democratic credentials and a transparent regulatory
framework, a large population, access to raw materials and political stability
opens up new vistas of opportunities for foreign investment in both the public
and private sectors.

Comparison With Other
Developing Countries

The 2014 UNCTAD World Investment Report acknowledges that
“South Africa holds a potential stronger appeal to foreign investors than any
other countries in the world.” With the African continent is now widely
acknowledged as the next growth frontier, SA is in the fortunate position of
having identified the growth opportunities in Africa many years ago already.
Though South Africa remained the most popular country in Africa for FDI, the
inflow is yet to tap its true potential.

South Africa Investment Prospects (Image: Gardenroute.com)

There are a number of areas where South Africa scores over developing
African and non-African economies as lucrative destination for foreign
investors.

Strong Fundamentals

South Africa’s unique selling point lies in the country
becoming a unique combination of a highly developed first-world economic
infrastructure and a huge emergent market economy providing ample scope for strong
entrepreneurial and dynamic investment environment. It has achieved political
and macro-economic stability, two key concerns in many developing markets. Controlled
fiscal deficit, high revenue generation and low debt-to-GDP ratio enable the
government to increase expenditure on social services and infrastructure and
reduce the costs and risks for investors, fuelling enhanced investment and
growth.

The UNDP Human Development Report 2013 cites increasingly
important role of South Africa alongside China, India and Brazil in the 21st
century. This underlines significant successes in ensuring macro-economic
stability achieved over the years through the implementation of policies
directed at promoting domestic competitiveness, long-term socioeconomic vision,
growth and employment. The biggest strength of South Africa lies in its
government policies, from the National Development Plan to the National
Infrastructure Plan, making a clear disposition before the world inviting
business owners and investors while upholding solid and trusted fundamentals. Continued
governmental support for the country's global and regional growth aspirations along
with “robust governance, strong auditing and a developed legal system"
position South Africa strongly among the developing countries. Robust
Domestic Base

The huge depository of natural resources and a large
domestic market make South Africa a promising opportunity for economic
freedom–led growth. Notwithstanding the fall in FDI in the wake of global
slowdown in the last few years, SA remained among the top three most lucrative
destinations in Africa for FDI. According to a recent report by McKinsey, “five
priority sectors that could help boost economic growth significantly and
increase employment opportunities in the country are advanced manufacturing,
infrastructure, natural gas, service exports, and agro-processing.” The report
highlights a potential combined addition of $87 billion to GDP from these five
sectors by 2030.

South Africa is the undisputed leader of Africa with a
contribution of 40 percent of the continent’s industrial output, 50 percent of
electricity and 45 percent of minerals. Despite a negligible 2 percent
contribution to the national GDP, the agriculture sector of the country is
among the top 20 most productive countries in the world. South Africa, which
has the fifth largest mining industry in the world, is the biggest producer of
platinum, 6th biggest in gold and coal and 9th in wool production. It also has
sizeable reserves of iron ore, manganese and chromites. While the country is
28th in numbers of car produced every year, it is at 18th place in terms of
cars sold. South Africa produces about 40 percent of known resources available
in the world.

The working age group amounts to 65 percent of the
population and the services sector contribute to about 65 percent of the GDP
followed by industry at 32 percent. South Africa is ranked 24th and 41st respectively
in the Economist’s Largest Gold Reserves Index and Biggest Exporters Index. It has the fastest growing tourist-industry in
the world currently accounting for 12 % of the GDP. The World Economic Forum's
Travel and Tourism Index lists the country on 29th position due policies
conducive to the sector's development and good assessment of infrastructure.
Above all, it is both a contributor to and beneficiary of seamless global
economic integration.

Ease of
Doing Business

South Africa has one of the most business-friendly and
liberalized environment in terms of economic interaction, trade, investment and
rehabilitation of financially distressed companies. The country has consistently
been ranked in critical areas of national competency by key indices, such as
the World Economic Forum Global Competitiveness Report, the World Bank Ease of
Doing Business Index, the World Economic Forum Travel and Tourism Index. This
is an indication of the preeminent position “Brand South Africa” has secured, global
perception of it as a reliable and attractive investment destination and national
ability to outperform other developing economies. The national financial sector
is recognized as a top global performer in the most recent Global Competitiveness
Index released at the World Economic Forum.

Even among the BRIC countries, South Africa leads in six of
10 criteria for ease of doing business, according to the 2013 World Bank Ease
of Doing Business Index. These are starting a business, protection of
investors, ease of getting credit, construction permits and payment of taxes. The
2015 index acknowledges policy changes in the last two years allowing greater
labor freedom, fiscal freedom, trade freedom, and freedom from corruption. It
also highlights South Africa’s initiatives to decrease the time, cost, and red
tape business have to deal with to get products to port and shipped to
international markets.

The country has an economic freedom score of 62.6, highest
in Africa. While the government has withdrawn price controls over most of the
items, labor laws are not strictly enforced. It requires just 19 days and five
procedures to launch a company in South Africa. There is no requirement for
minimum capital and need to reserve a company name. Electronic filing and less
transfer duty make property transactions fast and less costly. The country is
ranked 23rd out of 81 countries in the Jones Lang LaSalle's "World's most
Transparent Real Estate Markets" ahead of all its BRIC partners.

Location Advantage South Africa (Image source: AtlantaBlackstar)

The national government also offers various incentives in
terms of protection, no restrictions on the form or the extent of foreign
investment, simple tax rules, 15 percent foreign investment grant, protection
of intellectual rights, skill support financing up to 50 percent, tax
allowances for strategic industrial projects, tax-free grants critical infrastructure
facilities, and much more.Geographical
Advantage

The geographical location of South Africa also holds many
lucrative possibilities for investors. It acts as a door to Africa and a link
between the east and west. The country has positioned itself as the fulcrum of
African revival. Stability, tranquility and security along with pre-existing
business friendly environment make South Africa a door for many investors to
have a share in the economy of other African countries. This has been
particularly beneficial for home-grown multinationals which have made an
investment exceeding $6.9 billion in 2014, a 4.3 percent increase compared with
2013, more prominently in retail, telecom, mining, services and manufacturing,
outside of national borders, mostly in other African economies.

South Africa financial and technology giants are also at the
forefront of investment in Africa. A big chunk of agricultural, mining, energy
and other products are consumed by fellow African countries. Its banks are the
biggest source of credit for businesses in Sub-Saharan Africa. As Nigeria and
most of North Africa fight to emerge from chaos and violence and many in the
sub-Saharan region seriously lacking on the infrastructure front, the country
offers an attractive choice for foreign businesses looking for the realization
of their African dreams.

The country is perfectly placed to become the center stage
of trade between emerging markets of Asia, Africa and Latin America. Port
Elizabeth, Cape Town, Durban and East London can be launch pads for these markets
inviting investors to make the most of lucrative possibilities, wealth of
natural resources and huge export and import opportunities, developed
infrastructures, tax and customs reduction and a reasonably competitive
domestic economy that exist in the country.

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